New York Attorney General Letitia James has obtained a court order against crypto exchange Bitfinex ( iFinex Inc.) and stablecoin Tether alleging violations of New York law in connection with “ongoing activities that may have defrauded New York investors that trade in virtual or cryptocurrency.
Bitfinix is one of the largest crypto exchanges in the world with a daily trading volume of over $250 million, according to Coinmarketcap.
Tether was the first stablecoin and remains the largest by market cap.
AG James said their investigation determined that the Bitfinex operators, who also control Tether, have engaged in a cover-up to hide a loss of $850 million of “co-mingled client and corporate funds.”
“New York state has led the way in requiring virtual currency businesses to operate according to the law. And we will continue to stand-up for investors and seek justice on their behalf when misled or cheated by any of these companies,” said the AG.
Tether has long been plagued about questions regarding its claims of being backed by US dollars in a similar amount. At the time of this report, Tether had a USD value of $0.9865 and a market cap of approximately $2.8 billion.
In papers filed with the Manhattan Supreme Court, the AG demanded operators immediately cease dissipation of the Tether stablecoins while the investigation continues. The AG demanded documents and information be provided by the companies and barred them from “destroying, deleting, or permitting others to delete, potentially relevant documents and communications, including documents and communications stored on any self-deleting or “ephemeral” computer applications.”
Securities Attorney Scott Andersen, who worked for the New York AGs Investor Protection and Securities Bureau for eight years, provided perspective to Crowdfund Insider:
“The NY Attorney General’s office has used the powerful Martin Act to obtain an order “enjoining iFinex Inc., operator of the Bitfinex virtual asset trading platform, and Tether Limited, issuer of the “tether” virtual currency, and their related entities, from further violations of New York [securities] laws… .,” said Andersen. “The Martin Act is a statute like no others that broadly empowers the NY Attorney General to conduct civil and criminal investigations for securities law violations. The NY Attorney General under the Martin Act has broader powers than any other securities regulator. The specific tool used here, N.Y. General Business Law section 354, enables the NY Attorney General to obtain an ex parte order for preliminary injunctions and can require the Respondents to produce evidence or require testimony before a court, simply upon the NY Attorney General’s information and belief that the testimony is material and necessary.”
To date, Bitfinex/Tether have failed to produce requested documents to the Office of the Attorney General.
Andersen said the tool is rarely used by the NY AG. And that it enables the Office to essentially conduct a public investigation of the alleged misconduct in question before formally filing a summons and complaint.
“The NY Attorney General’s Investor Protection and Securities Bureau continues to lead the investigation of virtual currency businesses. Their prior report on Virtual Market Integrity issued in 2018 put a spotlight on the potential misconduct occurring on unregulated virtual currency markets,” added Andersen.
In the aforementioned report, the AG reported “substantial potential for conflicts between the interests of the platform, platform insiders, and platform customers.”
In November 2018, the AG issued subpoenas to Bitfinex and Tether.
The AG’s office said that Bitfinix “no longer has access to over $850 million dollars of co-mingled client and corporate funds that it handed over, without any written contract or assurance, to a Panamanian entity called “Crypto Capital Corp.,”
This is a loss that Bitfinex apparently never disclosed to investors.
Additionally, the AG stated that in order to fill the gap, executives of Bitfinex and Tether engaged in a series of conflicted corporate transactions whereby Bitfinex gave itself access to up to $900 million of Tether’s cash reserves, which Tether for years repeatedly told investors fully backed the tether virtual currency “1-to-1” in US dollars.
Bitfinex has already taken at least $700 million from Tether’s reserves, stated the AG which called the cash a “corporate slush fund” which is being used to hide Bitfinex’s “massive, undisclosed losses and inability to handle customer withdrawals.”
In a separate document, embedded below, the AG outlined the web of holding that created the corporate structure to control Bitfinex and Tether.
Stablecoin competitor Paxos shared the following statement regarding the profound claims against Bitfinex and Tether:
“The news today reinforces our belief that regulation and oversight create confidence and stability for the industry and Paxos is proud of its NYDFS-granted Trust charter, the highest form of regulation in the space. The industry is trading billions of dollars worth of cryptocurrencies daily – and relying on exchanges and stablecoins that have no licensing, no registration, no oversight, is bad for business and reckless in the long term. We knew this was coming – and we’ve been expecting the tide to turn. That’s why we built Paxos within the framework of regulation and oversight for both our PAX stablecoin and itBit exchange.”
The AG’s office said the ongoing investigation is being handled by Senior Enforcement Counsel John D. Castiglione and Assistant Attorney General Brian M. Whitehurst of the Investor Protection Bureau, and Assistant Attorney General Johanna Skrzypczyk of the Bureau of Internet and Technology, supervised by Chief Deputy Attorney General for Economic Justice Christopher D’Angelo, Investor Protection Bureau Chief Kevin Wallace, and Bureau of Internet and Technology Chief Kim Berger. Legal Assistant Charmaine Blake is assisting in the investigation.